Introduction of a negative list in GST for Service Tax was put into place Monday. This means the states are now arguing for a 100% revenue share of all that is taxable by states in services. That means Finance Miniistry is being pushed into a corner with direvct revenue collection by states replacing central allocations and that does mean weaknesses in the tax structure from adhocism at state level that undeniably plagues India's Federated loosely held together coalition of forces. The supremacy of the Centre in India's democracy is much of the reason for its stability despite the apparent political fragmentation counting political risk as so important in this region.

However on the plus side, Service Tax as proportion of revenues is a good 29% this year and the tax would compensate for the over $6-7 bln in levies foregone on Petrol and Diesel in concessions made this year. The overall indirect tax revenue target of INR 4 Tln or $80 bln will be easily outperformed as available from the 9 month performance of 75% of the exact INR 3.92 Tln target. Services being 63% of the GDP this contribution can easily be increased to 35%. Economists target the negative list rationalisation as adding 3-4% to Service Tax share. SErvice Tax target for the year at INR 820 bln(HT) is likely to be crossed to INR 1.2 tln ( INR 1.1 Lakh crore in 2011-12) at INR 500 bln in the first six months as we surmised earlier. 

The negative list is defined as all items on which tax cannot be charged and once the states demand is dropped it can move forward to include specific emergency services and thus tax luxury train travel, or house rent exceeding 100,000 specifically without administration hassles and doubt over what falls into the tax net. A negative list clears the way for tax officers and assessees to determine without undue benefits / losses on the account of paying taxes and counting rightful revenues

With only 22 on the negative list in the original CBEC fdraft ( concept paper link), not including construction but including second class train travel for example, all Services can be duly taxed in proportion to their GDP contribution and any other extra burden on Excise , customs and thence even Direct taxes be rationalised. If the negative list is put in place, 40% of the services will be taxed and the share of Service tax in the revenue mix will shoot up. The negative list will excliude infra projects and single dwelling units, second class travel 

States expect to get good revenues from Health and Fitness services, Entertainment ( maybe increase the footprint of entertainment districts to stay open after midnight too), Air conditioned restaurants and Construction payments to contractors currently untaxed in the last two cases for low rate s on food and a general lack of accountability in the latter(HT) 

Posted via email from The India Investment Post